Management's Discussion and Analysis of Financial Condition and Results of
Operations

The financial condition and operating results of CILCORP Inc. and its
subsidiaries (the Company) primarily reflect the operations of Central Illinois
Light Company (CILCO), the Company's principal business subsidiary.  The
Company's other core business subsidiary is QST Enterprises Inc. (QST).  The
Other Businesses segment includes the operations of the holding company itself
(Holding Company), its investment subsidiary, CILCORP Investment Management Inc.
(CIM), and its venture capital subsidiary, CILCORP Ventures Inc. (CVI).

CILCO is a regulated public utility engaged in the generation, transmission
and distribution of electric energy and the purchase, transportation and
distribution of natural gas in Central Illinois.

QST, formed in December 1995, provides energy and energy-related services to a
broad spectrum of retail and wholesale customers through its subsidiary, QST
Energy Inc. (QST Energy) which began operations in 1996.  QST also provides
fiber optic and advanced Internet-based communication services and products
through QST Communications Inc. (QST Com), another subsidiary which was
formerly CILCORP Fibercom Inc., a subsidiary of CVI.  QST's operations include
those of Environmental Science & Engineering, Inc. (ESE), a former first-tier
CILCORP subsidiary which, effective October 29, 1996, became a QST subsidiary.
ESE's results are reported as a separate business segment from QST's energy
and telecommunications operations.

ESE is an environmental consulting and engineering firm with additional
capabilities in laboratory analysis and equipment manufacturing.  ESE, through
a subsidiary, also acquires environmentally impaired property for remediation
and resale.

                                    OVERVIEW

Contributions to the Company's earnings per share for the last three calendar
years are shown below:
<TABLE>
<CAPTION>
                              1996           1995          1994
<S>                          <C>            <C>           <C>
CILCO                        $3.11          $2.97         $2.26
QST (excluding ESE)          (.30)             --           --
ESE                          (.44)            .01           .14
Other Businesses             (.30)           (.05)          .10
                             -----          -----         -----
  Earnings per share         $2.07          $2.93         $2.50
                             =====          =====         =====
</TABLE>
CILCO's earnings increased by 5% in 1996.  Electric gross margin increased by
1%, while gas gross margin increased by 5% due to increased sales resulting
from colder weather during the heating season.  Other factors contributing to
CILCO's favorable results were decreased operating expenses due to the
deferral of a maintenance outage at a generating station and lower wage
expense due to the 1995 early retirement programs (see CILCO's Early
Retirement Programs).  Partially offsetting these decreases in operating
expenses were a $5.4 million after-tax charge ($.40 per share) related to an
early retirement program offered by CILCO in November 1996 (see CILCO's Early
Retirement Programs), increased outside service costs ($.16 per share) (see
Competition), and a one-time $1.4 million after-tax charge ($.10 per share)
related to a write-off of inventory.

A $7.8 million after-tax charge related to CILCO's 1995 early retirement
programs reduced that year's earnings by $.59 per share, partially offset by
the sale of two parcels of land at the former R.S. Wallace electric
generating plant site which generated an after-tax gain of $2.1 million, or
$.16 per share.

Earnings for 1994 reflect a $4.5 million after-tax charge due to the Illinois
Commerce Commission's (ICC) disallowance of a portion of CILCO's investment
in renewing its gas system in Springfield, Illinois.  In 1994 CILCO also paid
$1 million, consisting of a fine and expenses, related to a U.S. Department
of Justice and U.S. Department of Transportation review of CILCO's gas
operations.  These one-time charges reduced 1994 earnings by $.42 per share.

QST was formed in December 1995; its earnings are reflective of a company in
the initial stages of development.  ESE's earnings declined in 1996 due to
reduced levels of business caused by a variety of factors, primarily industry
overcapacity resulting from changes in the regulatory climate at both the
federal and state levels.  Charges related to the downsizing or closing of
operations, including the Denver laboratory, drilling operations and certain
consulting offices, to reflect business conditions also contributed
significantly to the 1996 loss.  These and similar expenses totaled $4.3
million, including severance costs, asset write-offs, and pre-tax operating
losses of closed operations.

Other Businesses results declined in 1996 due to a write-down of an
investment held by CIM, increased costs relating to corporate repositioning
at the Holding Company and costs relating to the Caterpillar alliance
(see Competition).  Also, revenue from CIM's lease portfolio was lower in
1996 compared to 1995 due to the normal maturation of the lease portfolio.
Results for 1994 reflect a $1.8 million gain on the sale of stock and
warrants held by a CILCORP subsidiary as a result of a leveraged lease
restructuring.

The following table summarizes each business segment's contribution to net
income (see Results of Operations for further discussion).
<TABLE>
<CAPTION>
                                      1996         1995        1994
<S>                                 <C>          <C>         <C>
                                                (in thousands)
Electric operating income           $52,113      $48,769     $49,623
Gas operating income                 17,565       14,779       8,884
                                    -------      -------     -------
Total utility operating income       69,678       63,548      58,507
Utility interest expense and other  (28,053)     (24,743)    (24,686)
Disallowed plant cost of                                     
   regulated subsidiary, net of tax    --           --        (4,541)
Non-regulated energy and energy                              
  services loss                      (3,998)        --          --
Environmental and engineering                                
   services net income (loss)        (5,999)         113       1,824
Other Businesses net income (loss)   (3,685)        (336)      1,482
                                    -------      -------     -------
   Net income                       $27,943      $38,582     $32,586
                                    =======      =======     =======
</TABLE>
Return on average common equity was 7.7% in 1996 compared to 11% in 1995 and
9.5% in 1994.  The ratio of common equity to total capitalization, including
short-term debt, was 46% in 1996, 43% in 1995 and 44% in 1994.  The fixed
charge coverage ratio decreased to 2.1 in 1996 compared to 2.7 in 1995 and
2.6 in 1994.

Inflation may have a significant impact on the Company's future operations
and its ability to contain costs. To help protect CILCO from the effects of
inflation, substantially all electric and gas sales rates include a fuel
adjustment clause or a purchased gas adjustment clause to provide for changes
in electric fuel costs, excluding coal transportation, and changes in the
cost of natural gas.  Over the past five years, the annual rate of inflation,
as measured by the Consumer Price Index, has ranged from 2.6% to 3.0%.

                           Forward-Looking Information

Forward-looking information is included in Management's Discussion and Analysis
of Financial Condition and Results of Operations (MD&A).  Certain material
contingencies are also described in Note 9 to the Consolidated Financial
Statements.

Some important factors could cause actual results or outcomes to differ
materially from those discussed in the MD&A.  These factors include prevailing
governmental policies, statutory changes, and regulatory actions with respect to
rates, industry structure and recovery of various costs incurred by CILCO in the
course of its business; the extent and effect of participation by CILCO's
customers in its Power Quest programs; and increasing wholesale and retail
competition in the electric and gas businesses.  The business and profitability
of CILCORP and its subsidiaries are influenced by economic and geographic
factors, including ongoing changes in environmental laws, regulations and
policies which affect demand for ESE's services; weather conditions; the extent
and pace of development of competition for retail and wholesale energy
customers; pricing and transportation of commodities; market demand for energy
and for environmental consulting and analytical services; inflation; capital
market conditions; and environmental protection and compliance costs.  All such
factors are difficult to predict, contain uncertainties that may materially
affect actual results, and to a significant degree are beyond the control of
CILCORP and its subsidiaries.

                         CAPITAL RESOURCES AND LIQUIDITY

The Company believes that internal and external sources of capital which are
or will be available to the Holding Company and its subsidiaries will be
adequate during the coming year to fund the Company's capital expenditures
program, pay its financial obligations, meet working capital needs and retire
or refinance debt as it matures. The Company's long-term ability to declare
and pay dividends depends upon the ability of its subsidiaries to generate
cash from their operations, future business conditions, earnings, and the
financial condition of the Company.
                                        
THE COMPANY

The Company issued 275,074 and 299,850 shares of common stock during 1996 and
1995, respectively, through the CILCO Employees' Savings Plan (ESP) and the
CILCORP Inc. Investors Choice Automatic Reinvestment and Stock Purchase Plan
(DRIP).  These shares were issued at average prices of $41.55 and $37.83 for
1996 and 1995, respectively.  Effective December 19, 1996, issuance of new
shares of common stock through the ESP and DRIP was suspended for at least 90
days.  Depending on market conditions and corporate needs, the Company may
issue additional shares of common stock through the ESP or the DRIP at the
end of this 90-day period.  On December 23, 1996, the Company began a direct
registration program to allow investors to make initial purchases of CILCORP
common stock directly from the Company without utilizing the services of a
broker.  The proceeds from any newly-issued stock have been, and will
continue to be, used to retire CILCORP short-term debt, to meet working
capital and capital expenditure requirements at subsidiaries other than
CILCO, and for other corporate purposes.

CILCORP is currently authorized by its Board of Directors to borrow up to $50
million on a short-term basis.  The Company had $50 million of committed bank
lines and $5 million of discretionary bank lines at the end of 1996 and 1995.
At December 31, 1996, $18 million of the lines were used, compared to $22.5
million in use at December 31, 1995.

After retirement of $3 million of medium-term notes during 1996, the Company
had $42 million of medium-term notes outstanding at year-end.  The Company
may issue an additional $27 million under its existing $75 million medium-
term note program.  The Company may issue additional notes in the future
under this program to retire maturing debt and to provide funds for other
corporate purposes.

CILCO

In 1996, CILCO spent $43.6 million for capital additions and improvements.
These expenditures consisted primarily of replacements and improvements to
the existing electric transmission and distribution and natural gas
distribution systems.

CILCO's estimated capital expenditures for 1997 are $53.2 million, including
$7.8 million for electric energy supply and transmission projects,
$1.3 million for gas supply and transmission projects, $28.4 million for
electric and gas distribution system improvements, and $11.8 million for
information technology projects.  Actual capital expenditures may vary from
these estimates due to a number of factors, including changes in costs of
labor, equipment, capital, environmental regulations, and load growth
estimates.

CILCO's short-term debt decreased to $9.9 million at December 31, 1996, from
$24.6 million at December 31, 1995.  CILCO expects to issue commercial paper
periodically during 1997, and is currently authorized by its Board of
Directors to issue up to $66 million of short-term debt.  At December 31,
1996, committed bank lines of credit totaled $20 million, all of which were
unused except in support of commercial paper issuance.  During 1997, CILCO
expects the support of commercial paper issuance to be the sole use of these
bank lines of credit.

CILCO retired $16 million and $20 million, respectively, of first mortgage bonds
in February 1996 and March 1997.  CILCO plans to finance its 1997 and 1998
capital expenditures with funds provided by operations.  Future funds provided
by operations may be affected by the deregulation of the electric and natural
gas utility industries (see Competition).

QST (Excluding ESE)

Capital expenditures totaled approximately $2.4 million for 1996, primarily
for construction of fiber optic and other communication facilities.  QST
Energy capital expenditures for 1997 are estimated to be $10.6 million,
primarily for an on-site generation project currently in the development
stage.  QST Com's estimated capital expenditures for 1997 total $3.3 million.
Depending upon business growth, up to an additional $8 million may be needed
by QST for working capital by year-end.  QST expects to finance new
investments, working capital needs and any operating losses during 1997 with
funds provided by the Holding Company.

QST had outstanding debt of $4 million at the end of 1996, all of which was
owed to the Holding Company.

ESE

ESE spent $.6 million for capital additions and improvements in 1996.  ESE
plans to spend $1.4 million in 1997 on capital additions.

ESE generated $6.3 million of cash from operations in 1996, after reflecting
purchases and sales of real estate held for resale by its wholly-owned
subsidiary, ESE Land Corporation (ELC), and other fixed asset dispositions.
During 1996, ELC invested $7.6 million to acquire land for remediation and
resale and sold a property with a book value of $3.3 million acquired in 1995,
realizing a pre-tax gain of $.4 million.  ELC expects to invest $8.3 million
($5 million of which it expects to finance with non-recourse debt) in 1997 to
acquire land for remediation and resale.

ESE's cash flow is supplemented by a $15 million revolving line of credit with
the Holding Company which expires on May 2, 1998.  At December 31, 1996, this
line of credit was unused, compared to $2.6 million outstanding at December
31, 1995.  At December 31, 1996, ESE had long-term borrowings of $20 million
(due on May 2, 1998) from the Holding Company and advances to the Holding
Company of $.9 million.  ESE increased its cash and short-term investments to
$2.1 million at December 31, 1996, compared to zero at year-end 1995.  ESE
also has a $10 million bank line of credit to collateralize performance bonds
issued in connection with ESE projects, of which $4.4 million was committed as
of December 31, 1996.  ESE anticipates that cash and short-term investments,
funds generated by operations and the amounts available under the Holding
Company revolving line of credit will be sufficient to meet its anticipated
working capital requirements.

CIM

CIM had outstanding debt of $29 million and $26 million at the end of 1996 and
1995, respectively.  The debt at the end of 1996 consisted of $26 million
borrowed from the Holding Company and $3 million borrowed from external
sources.  During the fourth quarter of 1996, CIM committed $15.8 million to
fund four affordable housing tax credit investments.  Approximately $5 million
of this commitment was funded in cash in 1996. In 1997 CIM expects to
contribute $7 million in cash for these investments, with substantially all of
the remainder of the cash contributions to be made in 1998.  The cash to fund
these investments was obtained from Holding Company borrowings.  CIM expects
to finance new investments and working capital needs during 1997 with a
combination of funds generated internally and with funds provided by the
Holding Company.
                                        
                                   COMPETITION

CILCO anticipates significant changes in the electric utility industry at both
the wholesale and retail levels in the years to come, including increased
competition.  CILCO also anticipates changes in the natural gas industry at the
retail level.  Management cannot predict the ultimate effect of these changes,
but believes that they will eventually result in all customers having the
opportunity to select the energy supplier of their choice and that low operating
costs, improved efficiency and new and better services and products will be the
key competitive factors for utilities.

CILCO has introduced a Consumer Freedom to Choose Electricity Law (Choice Law)
to be considered by the Illinois General Assembly in 1997.  The Choice Law, if
enacted: (1) provides that beginning January 1, 1998, consumers in Illinois may
purchase electricity and customer-related services from any supplier they
choose; (2) continues monopoly services where appropriate; (3) allows for a
smooth transition to a competitive market; (4) ensures life-sustaining
requirements for electricity are met for residential customers; (5) allows for
financially distressed utilities to prove their need for assistance through the
transition to a competitive market via a lost margin charge; (6) removes
unnecessary regulation; and (7) creates a level playing field where taxation is
not a barrier to effective supplier competition.  Other legislative proposals
regarding electric utility competition have been, or are expected to be,
introduced in the General Assembly and in the United States Congress.
Management cannot predict the ultimate form of any legislation which may be
enacted.

Various mergers and business combinations are occurring in the utility industry.
Many utilities are preparing for a competitive marketplace by merging with or
acquiring other utilities.  Management will monitor this activity and continue
to position itself for competition by keeping costs and prices low, maintaining
good customer relations, and developing the flexibility to respond directly to
individual customer requirements.

In preparation for a competitive marketplace, the Company has undertaken
corporate repositioning activities, including developing new product offerings,
upgrading customer data systems, and tapping needed expertise through alliances,
consulting relationships, and the hiring of employees with experience in
competitive markets.  During 1996, the Company has incurred approximately $9.3
million of pre-tax expense for these repositioning activities, including
consulting fees but excluding the charges for CILCO's early retirement program.
In addition to these repositioning costs, ESE, in its efforts to respond to
continued competitive pressures, incurred approximately $4.3 million in charges
in 1996 for severance and outplacement costs, write-off of assets and other
similar charges.  Management expects the Company's 1997 earnings to be impacted
to a lesser degree by items of this nature.

In 1996, to lead the movement toward increased customer choice, CILCO began
Power Quest, which consists of two electric pilot retail competition programs
and a natural gas pilot retail competition program.  The programs offer greater
choice to customers and provide the opportunity for CILCO and certain of its
electric and natural gas customers to participate in a competitive business
environment.  Broadened consumer choice throughout Illinois and the nation will
expand CILCORP's business opportunities.

CILCO has experienced a reduction in electric profit margin because some
eligible customers are purchasing some or all of their power requirements from
other suppliers as a result of Power Quest.  The amount of any such reduction
depends largely upon the extent of customer participation in the programs.
CILCO has offset some of the reduced profit margin by increased wholesale
electric sales outside its service territory.  Also, CILCORP established QST in
December 1995 to compete with non-regulated marketers for customers in the pilot
areas.  Its subsidiary, QST Energy, is currently serving over 90% of the Power
Quest customers who have chosen a supplier other than CILCO.

CILCORP has formed a strategic alliance with Caterpillar Inc. (Caterpillar), the
largest of the industrial customers eligible to participate in Power Quest.
Caterpillar will remain a full requirements customer of CILCO for the first year
of the Power Quest program, but in exchange CILCORP will provide additional
value-added service and innovative solutions to energy and environmental needs.
Costs associated with the Caterpillar alliance are reflected in Other Businesses
Operations.

One of CILCO's electric pilot programs permits eight of CILCO's largest
industrial customers that had peak loads of 10 megawatts or more to secure part
or all of their electric power requirements from suppliers other than CILCO,
subject to the limitation that at no time shall total purchases from other
suppliers by participants in the program exceed 50 megawatts (approximately 10%
of CILCO's industrial load).  CILCO may extend the program's two year term with
the approval of the ICC.  Industrial customers began receiving electricity under
this Power Quest program in May 1996.  For the industrial pilot program, CILCO
could experience a reduction in pre-tax income of up to $5.2 million on an
annual basis if the entire 50 megawatts of eligible industrial capacity moved to
off-system suppliers.  Based on participation levels by eligible industrial
customers during 1996, CILCORP experienced a reduction of $3.8 million of pre-
tax income (including costs associated with the Caterpillar alliance offset by
gross margins earned by QST).  Assuming the same participation level for all of
1997, CILCORP would experience a reduction to pre-tax income, excluding costs
associated with the Caterpillar alliance, of $2.2 million.

In the other Power Quest electric program, CILCO designated six areas within its
service territory as Open Access Sites for up to five years.  The sites include
the Central Illinois communities of Heyworth, Manito, Peoria Heights and
Williamsville; a large regional shopping center in Peoria; and a developing
commercial business site in Lincoln.  During that period, approximately 5,500
customers located within these Open Access Sites are eligible to purchase some
or all of their electric power requirements from suppliers other than CILCO.
CILCO may extend the program's five year term with ICC approval.  Customers in
all but the Peoria Heights Open Access Sites began receiving electricity from
suppliers other than CILCO in May 1996.  If all eligible customers in Open
Access Sites participate in Power Quest, CILCO would experience a reduction in
pre-tax income of up to $1.2 million on an annual basis.  Based upon
participation levels by eligible commercial and residential customers during
1996, CILCORP experienced a reduction of $.3 million of pre-tax income.
Assuming the same participation level for all of 1997, CILCORP would experience
a reduction to pre-tax income of $.4 million.

CILCO's gas residential pilot program is a five year program that allows
residential gas customers located in sites designated by CILCO to select their
natural gas supplier, with CILCO continuing to provide distribution and metering
services.  CILCO selected the Central Illinois towns of Heyworth, Manito, and
Williamsville as the initial sites for the gas pilot program and later added the
city of Springfield, Illinois, subject to the limitation that no more than 8,000
residential customers from Springfield may participate in the program.
Participants in the gas retail pilot program began receiving natural gas from
other suppliers in October 1996.  This program did not have a material adverse
impact on CILCO's 1996 financial position or results of operations nor does
management believe this program will have a material adverse impact on CILCO's
future financial position or results of operations.

                        CILCO'S EARLY RETIREMENT PROGRAMS

As part of a continuing effort to better position itself for competition in the
energy services industry (see Competition), in November 1996, CILCO offered
Voluntary Early Retirement Programs to eligible management and office and
technical employees and employees represented by the International Brotherhood
of Electrical Workers (IBEW).  A total of 76 of the 210 eligible employees
retired, effective January 1, 1997.  The 1996 programs resulted in an after-tax
charge to earnings of approximately $5.4 million.  As a result of the 1996
programs, management expects to realize annual after-tax cost savings of
approximately $2.6 million beginning in 1997.

In 1995, CILCO offered similar Voluntary Early Retirement Programs to selected
employees.  A total of 166 of the 257 eligible employees accepted the offer,
resulting in an after-tax charge of approximately $7.8 million in 1995.  As a
result of the 1995 programs, CILCO realized approximately $3.4 million in annual
after-tax cost savings in 1996.

                              ENVIRONMENTAL MATTERS
                                        
CILCO's capital expenditures related to pollution control facilities are
estimated to be $5.8 million in 1997.  The acid rain provisions of the Clean
Air Act Amendments of 1990 (Amendments) require additional sulfur dioxide
(SO2) and nitrogen oxide (NOx) emission reductions at CILCO's generating
facilities.  CILCO's facilities are exempt from Phase I of the Amendments due
to previous emission reductions, but are subject to Phase II of the Amendments
which require additional emission reductions by the year 2000.

CILCO's final compliance strategy is being developed based upon regulations
issued under the Amendments.  CILCO has not yet determined definitive
compliance costs.  CILCO continues to monitor regulatory actions and develop
compliance strategies to minimize any financial impact.  Under current
regulatory policies, CILCO can recover compliance costs associated with the
Amendments and other environmental regulations through rates charged to
customers.  CILCO's present strategy includes use of an existing SO2 scrubber,
limited fuel switching and SO2 allowance purchases to meet Phase II SO2
emissions targets, and combustion control modifications to meet Phase II NOx
emissions targets.  The U.S. Environmental Protection Agency (USEPA)
established SO2 emission allowance reserves for power plants in Phase II.
Allowances are transferable to third parties at market prices.  CILCO
continues to weigh the costs of purchasing additional allowances against
alternative operating scenarios.  Under this strategy, CILCO's generating
units will not require additional SO2 scrubbers.  During 1997, CILCO expects
to spend $4.1 million for boiler retrofits and emissions monitoring equipment
related to the Amendments.

Neither CILCORP, CILCO, nor any of their affiliates has been identified as a
potentially responsible party under federal or state environmental laws
governing waste storage or disposal.

CILCO continues to investigate and/or monitor four former gas manufacturing
plant sites located within CILCO's present gas service territory.  The purpose
of these studies is to determine if waste materials, principally coal tar, are
present, whether such waste materials constitute an environmental or health
risk and if CILCO is responsible for the remediation of any remaining waste
materials at those sites.  Remediation work at one of the four sites was
completed in 1991.  A risk assessment/remedial alternatives study at a second
site was completed in 1996, taking into consideration new clean-up options
under current Illinois law.  A remedial action plan for the second site is
expected to be determined during 1997, with remediation of the site expected
to begin in late 1997.  CILCO has not determined the ultimate extent of its
liability for, or the ultimate cost of any remediation of, the remaining two
sites, pending further studies.

CILCO spent approximately $.4 million for former gas manufacturing plant site
monitoring, legal fees and feasibility studies in 1996.  A $3.9 million
regulatory asset and a corresponding liability are recorded on the Balance
Sheets representing the minimum amount of future coal tar investigation and
remediation costs CILCO expects to incur.  Coal tar remediation costs incurred
through December 1996 have been deferred on the Balance Sheets, net of amounts
recovered from customers (see Note 1).

Through December 31, 1996, CILCO has recovered approximately $4.5 million in
coal tar remediation costs from its customers through a gas rate rider approved
by the ICC.  Currently, that rider allows recovery of coal tar remediation costs
in the year they are incurred.  Under these circumstances, management believes
that the cost of coal tar remediation will not have a material adverse effect on
CILCO's financial position or results of operations.

                     GAS PIPELINE SUPPLIER TRANSITION COSTS
                                        
CILCO's natural gas suppliers are subject to various Federal Energy Regulatory
Commission (FERC) orders and settlements related to the transition to a more
competitive natural gas industry.  FERC Order No. 636 unbundled the sale,
transportation and storage functions of interstate gas pipelines, and also
allowed pipelines to recover prudently incurred transition costs from gas
distribution companies.  On July 16, 1996, the United States Court of Appeals
affirmed Order No. 636 "in its broad contours and in most of its specifics," but
remanded parts of Order No. 636 for further explanation including the FERC's
failure to allocate any part of transition costs to the pipelines.  FERC Order
No. 500 and Order No. 528 allow interstate gas pipelines to bill gas
distribution companies for take-or-pay and other charges related to the
transition to a more competitive gas industry.

For the year ended December 31, 1996, CILCO paid $1.6 million to interstate gas
pipelines for transition costs.  These costs have been, or will be, recovered
from CILCO's customers through its purchased gas adjustment clause (PGA).  Since
these costs are currently recoverable from customers, management does not expect
gas pipeline supplier transition costs to materially impact CILCO's financial
position or results of operations.  CILCO has recorded a regulatory asset and a
corresponding liability of $1.0 million on its Balance Sheets as of December
31, 1996 for these transition costs, all of which will be due within one year
(see Note 1).
                            ACCOUNTING PRONOUNCEMENTS

No accounting pronouncements issued and not yet effective by the Financial
Accounting Standards Board (FASB) and the American Institute of Certified
Public Accountants (AICPA) in 1996 will have a material effect on the
Company's financial position, results of operations or cash flows.

                              RESULTS OF OPERATIONS

CILCO ELECTRIC OPERATIONS

The following table summarizes electric operating revenue and expenses by
component.
<TABLE>
<CAPTION>
Components of Electric Operating Income 1996       1995          1994
                                             (In thousands)
<S>                                 <C>           <C>           <C>
Revenue:                                                                
Electric retail                     $307,579      $321,066      $304,903
Sales for resale                      15,206         5,132         8,182
                                    --------      --------      --------
     Total revenue                   322,785       326,198       313,085
                                    --------      --------      --------
Cost of sales:                                                          
Cost of fuel                          90,715        94,235        97,184
Purchased power expense               10,907        12,353         9,433
Revenue taxes                         14,504        14,244        13,260
                                    --------      --------      --------
     Total cost of sales             116,126       120,832       119,877
                                    --------      --------      --------
        Gross margin                 206,659       205,366       193,208
                                    --------      --------      --------
Operating expenses:                                                     
Operation and maintenance                                               
 expenses                             84,174        89,113        75,806
Depreciation and amortization         42,530        40,665        39,130
Income taxes                          19,576        17,975        19,925
Other taxes                            8,266         8,844         8,724
                                    --------      --------      --------
     Total operating expenses        154,546       156,597       143,585
                                    --------      --------      --------
     Electric operating income      $ 52,113      $ 48,769      $ 49,623
                                    ========      ========      ========
</TABLE>
Electric gross margin increased 1% in 1996.  A retail kilowatt hour (kwh)
sales decrease of 4% was offset by increased sales for resale.  Residential
sales volumes decreased 4% while commercial sales volumes increased 2%.  The
residential sales decreases were primarily due to cooler summer weather.
Cooling degree days were 26% lower in 1996 than in 1995.  The commercial sales
increases were due to an increase in the number of commercial customers.
Industrial sales volumes decreased 9% compared to 1995.  These decreases were
due to decreased demand by several large customers and to customers switching
to off-system suppliers under CILCO's Power Quest program (see Competition).

Electric gross margin increased 6% in 1995, primarily due to a 4% increase in
retail kilowatt hour sales.  The increase in retail sales was partially offset
by a decrease in sales for resale revenue.  Residential sales volumes
increased 7% while commercial sales volumes increased 5%.  These increases
were primarily due to warmer summer weather.  Cooling degree days were 11%
higher in 1995 than in 1994.  Industrial sales volumes increased 1% compared
to 1994.  CILCO set a new all-time system peak demand of 1,188 megawatts (MW)
on August 17, 1995.

Sales for resale increased 196% from 1995 to 1996.  Sales for resale decreased
37% in 1995 compared to 1994.  Sales for resale vary based on CILCO's
available capacity for bulk power sales, energy requirements of neighboring
utilities, the price of power available for sale and expanding electric
markets outside CILCO's service territory.  In the future, CILCO expects
increased competition and reduced margins in the sales for resale and
purchased power markets.

The overall level of business activity in CILCO's service territory and
weather conditions are expected to continue to be the primary factors
affecting electric sales in the near term.  CILCO's electric sales and gross
margin may also be affected by increased competition in the electric utility
industry.

Despite greater electricity generation, cost of fuel decreased 4% in 1996
primarily due to lower coal and purchased power costs.  Substantially all of
CILCO's electric generation capacity is coal-fired. The cost per ton of coal
burned, including transportation cost, decreased 14% in 1996 compared to
1995.  Purchased power expense varies based on CILCO's need for energy and
the price of power available for purchase.  CILCO makes use of purchased
power when it is economical to do so, or when required to meet its power
requirements, such as during maintenance outages at CILCO plants.  Costs and
savings realized from the purchase of power are passed on to CILCO's
customers via the fuel adjustment clause (FAC), which requires CILCO to pass
increases and decreases in the cost of fuel through to customers.  CILCO
expects the wholesale power market to become increasingly competitive.

In April 1995, Freeman United Coal Mining Company (Freeman), a coal supplier
with whom CILCO has a long-term contract, notified CILCO of its intent to
change from the cash method of billing for postretirement benefits/costs
other than pensions to the accrual basis.  Freeman has billed CILCO an
additional $5.8 million for postretirement benefit costs for the period from
January 1, 1993, through December 31, 1995.  Under a settlement agreement
reached with Freeman, CILCO paid $2.6 million of these charges during 1996.
The remaining $3.2 million has been recorded as a liability on the Balance
Sheets and will be paid to Freeman during 1997.  Also, under the agreement,
CILCO will receive credit for expenses already paid to Freeman under the cash
method of billing.  These charges and credits from Freeman are being passed
to customers through the FAC.  Since these charges and credits are being
passed to customers, management does not expect Freeman's change to the
accrual basis to have a material adverse impact on CILCO's financial position
or results of operations.

Electric operation and maintenance expenses decreased 6% in 1996 compared to
1995.  The 1996 decreases were primarily due to lower wage expenses resulting
from the 1995 early retirement programs and the deferral of a maintenance
outage at the Duck Creek generating station until 1997.  Typically, CILCO
schedules a maintenance outage at one of its generating units each year but
did not undertake such an outage in 1996.  Pension expense also decreased in
1996 due to the lower cost of the 1996 early retirement program relative to
the 1995 program.  The decreases were partially offset by increased outside
service expenses (see Competition), higher bad debt expense, and a one-time
write-down for disposal of obsolete materials and supplies inventories.  The
1995 increases were primarily due to the 1995 early retirement programs,
power plant operation and maintenance expenses, and outside services, which
were partially offset by decreased costs accrued for certain benefits
provided to former or inactive employees.

The increases in depreciation and amortization expense in 1996 and 1995
reflect additions and replacements of utility plant at costs in excess of the
original cost of the property retired.

The changes in income taxes in 1996 and 1995 were primarily the result of
changes in pre-tax income.

CILCO GAS OPERATIONS

The following table summarizes gas operating revenue and expenses by
component.
<TABLE>
<CAPTION>
Components of Gas Operating Income  1996         1995           1994
                                          (In thousands)
<S>                               <C>            <C>            <C>
Revenue:                                                                
Sale of gas                       $187,432       $142,619       $138,161
Transportation services              8,338          8,927         10,124
                                  --------       --------       --------
     Total revenue                 195,770        151,546        148,285
                                  --------       --------       --------
Cost of sales:                                                          
Cost of gas                        108,286         68,948         78,696
Revenue taxes                        7,500          6,623          7,190
                                  --------       --------       --------
     Total cost of sales           115,786         75,571         85,886
                                  --------       --------       --------
          Gross margin              79,984         75,975         62,399
                                  --------       --------       --------
Operating expenses:                                                     
Operation and  maintenance                                              
  expenses                          35,160         36,443         33,511
Depreciation and                                                        
  amortization                      17,134         16,100         15,219
Income taxes                         6,972          5,292          1,564
Other taxes                          3,153          3,361          3,221
                                  --------       --------       --------
     Total operating                                                    
       expenses                     62,419         61,196         53,515
                                  --------       --------       --------
     Gas operating income         $ 17,565       $ 14,779       $  8,884
                                  ========       ========       ========
</TABLE>

Gas gross margin increased 5% in 1996 compared to 1995.  Residential and
commercial sales volumes increased 7% and 21%, respectively, primarily due to
colder weather during the heating season.  Heating degree days were 7% higher
in 1996 than in 1995.  Commercial sales were also positively impacted by
commercial customers switching back to CILCO system supply from gas
transportation.  A 1996 Illinois law which exempts certain customers from the
state gross receipts tax on natural gas has made it economical for some gas
transportation customers to resume purchasing gas from CILCO.

Gas gross margin increased 22% in 1995 compared to 1994.  Gross margin was
positively affected by a December 1994, 6.7% increase in overall gas base
rates (see Note 10).  Also, residential and commercial sales volumes increased
6% and 10%, respectively, primarily due to colder weather during the heating
season.  Heating degree days were 9% higher in 1995 than in 1994.

The cost of gas increased 57% in 1996 and decreased 12% in 1995, primarily due
to changes in natural gas prices.  These changes were passed through to
customers via the PGA.  Gas operation and maintenance expenses decreased 4% in
1996 and increased 9% in 1995.  The decrease for 1996 was primarily due to
lower wage expense resulting from the 1995 early retirement programs.  Pension
expense also decreased due to the lower cost of the 1996 early retirement
program relative to the 1995 programs.  The decreases were partially offset by
increased outside service expenses and higher bad debt expense.  The increase
for 1995 was principally due to increased pension expenses resulting from the
1995 early retirement programs, increased outside services expenses and
increased injury and damage claims.  Decreased gas regulatory commission
expenses partially offset the increases.

Revenue from gas transportation services decreased 7% in 1996 and 12% in 1995,
while the volume of gas transported decreased 4% in 1996 and 10% in 1995.
Transportation revenues for 1996 and 1995 declined primarily due to a
continuing decline in the number of commercial transportation customers.
There were 179 commercial and industrial transportation customers in 1996
compared to 391 customers in 1995 and 567 in 1994.  The 795 residential
transportation customers added in 1996 as a result of the Power Quest gas
residential pilot program generated $87,000 of transportation revenue in 1996
(see Competition).

During 1996 and 1995, CILCO utilized NYMEX (New York Mercantile Exchange)
futures contracts to hedge CILCO-owned natural gas storage.  For 1997, CILCO
expects hedging activity to remain at 1996 levels (see Note 12).

Weather conditions, the ability of customers to purchase gas on the open
market at competitive rates, the continuing trend toward more efficient gas
appliances and overall economic conditions in CILCO's service area will affect
future gas sales.

The increases in depreciation and amortization expenses in 1996 and 1995
reflect additions and replacements of utility plant at costs in excess of the
original cost of the property retired.

The changes in income taxes in 1996 and 1995 were primarily the result of
changes in taxable income.

CILCO OTHER INCOME AND DEDUCTIONS

Utility other income decreased in 1996 from 1995 primarily due to the sale in
December 1995 of two parcels of land at the former R.S. Wallace electric
generating plant site.  Sales of additional parcels during 1996 partially
offset this decrease.  In 1994, CILCO entered into an agreement to sell the
95-acre site for $7 million.  The sale of the remaining parcels at the site
will close in 1998.  Interest expense increased in 1996 from 1995 primarily
due to a full year of interest expense on $36 million of medium-term notes
issued during 1995, partially offset by interest on $16 million of long-term
notes retired in February 1996.

Utility other income increased in 1995 from 1994 primarily due to the
aforementioned sale of land at the former R.S. Wallace electric generating
plant site.  The after-tax gain from the sale was $2.1 million. Interest
expense increased primarily due to the issuance of $36 million of secured
medium-term notes (see Note 8) and an increase in short-term debt during
1995.

In 1994, disallowed gas plant costs, net of related income taxes, resulting
from an ICC gas rate order, significantly increased CILCO's other deductions
(see Note 10).  The civil fine and other costs CILCO agreed to pay as a
result of the U.S. Department of Justice and the U.S. Department of
Transportation investigations also contributed to the increase in other
deductions.

QST (Excluding ESE)

The following table summarizes the revenue and expenses for QST.
<TABLE>
<CAPTION>
Components of QST Net Loss         1996
                             (In thousands)
<S>                              <C>
Revenue:                         
Electric revenue                 $ 1,433
Gas revenue                       13,270
Other revenue                        132
                                 ------- 
     Total revenue                14,835
                                 -------
Cost of sales:                   
Cost of electricity                1,308
Cost of gas                       13,401
                                 -------
     Total cost of sales          14,709
                                 -------
          Gross margin               126
                                 -------
Other expenses:                  
General and administrative         6,594
Depreciation and amortization         83
Interest                              77
                                 -------
     Total other expenses          6,754
                                 -------
          Net loss before taxes   (6,628)
     Income taxes                 (2,630)
                                 -------                                 
QST net loss                     $(3,998)
                                 =======
</TABLE>
QST Enterprises Inc. was formed in December 1995 to facilitate CILCORP's
expansion into non-regulated energy and related services businesses.  QST's
initial focus has been to compete against energy suppliers who participate in
CILCO's Power Quest programs.  QST will also compete against marketers to
provide energy and services to customers of utilities and other energy providers
which will offer, or be required to offer, similar retail competition programs
and to sell energy to customers who may already have the ability to choose their
energy supplier. QST provides a portfolio of non-regulated, energy-related
products and services.

QST Energy's wholly-owned subsidiary, QST Energy Trading Inc. (QST Trading), is
a wholesale natural gas and power marketer which purchases, sells and brokers
energy and capacity at market-based rates to other marketers, including QST
Energy, utilities and other customers. QST Energy and QST Trading currently have
offices in Peoria, Chicago and Houston.  Additional offices may be opened as the
company continues to grow.

QST's net loss in 1996 was caused primarily by outside services and
administrative and general expenses, including QST salaries, which are not being
covered by revenues at this early stage of QST's development.  Gas revenue in
1996 resulted primarily from wholesale sales of gas by QST Trading, while
electric revenues were from participation by QST in Power Quest and a pilot
program of another Illinois utility.  Losses are expected to continue in 1997
but at a reduced level, as QST continues to develop its businesses.  Revenues
are anticipated to increase as the company grows through participation in
additional pilot programs; retail sales of energy to other energy marketers,
commercial and industrial customers; and wholesale natural gas and power
marketing transactions.


ESE

The following table summarizes ESE's revenue and expenses.
<TABLE>
<CAPTION>
Components of ESE Net Income (Loss)   1996           1995         1994
                                                (In thousands)
<S>                                   <C>         <C>          <C>
Environmental and                                           
   engineering services                                     
   revenue                            $86,497     $127,530     $132,799
Direct non-labor project costs         29,185       50,245       52,896
                                     --------     --------     --------
   Net revenue                         57,312       77,285       79,903
                                     --------     --------     --------
Expenses:                                                   
Direct salaries and other costs        30,375       38,624       39,720
General & administrative               30,198       30,153       29,319
Depreciation and amortization           5,069        5,646        5,867
                                     --------     --------     --------
Operating expenses                     65,642       74,423       74,906
                                     --------     --------     --------
Interest                                1,236        1,902        1,915
                                     --------     --------     --------
Income (loss) before income           (9,566)          960        3,082
taxes
Income taxes                          (3,567)          847        1,258
                                     --------     --------     --------
ESE net income (loss)                $(5,999)       $  113       $1,824
                                     ========     ========     ========
</TABLE>

ESE incurs substantial direct non-labor project costs from the use of
subcontractors on projects.  These costs are passed directly to ESE's
clients.  As a result, a better measure of ESE's operating performance is net
revenue, which is determined by deducting such direct non-labor project costs
from gross revenues.  Net revenue decreased by $20 million or 26% in 1996
compared to 1995 after decreasing by 3% in 1995 compared to 1994.  The 1996
decrease was due to reduced levels of business caused by a variety of
factors, including industry overcapacity resulting from changes in the
regulatory climate at both the federal and state levels.  The environmental
industry has been affected by the delayed reauthorizations of air, water and
toxic waste programs as both private clients and governmental agencies have
postponed environmental clean-up programs in response to regulatory
uncertainty.  Furthermore, the delay in federal budget approvals for 1996
compounded the industry's condition.  The continuing budget curtailment of
all federal agencies, including the USEPA, resulted in slowdowns and
significant delays in regulatory enforcement of existing programs.

These conditions have left the industry with excess capacity, resulting in
increased competitive pressures.  ESE significantly reduced its workforce
during the past year from 1,099 employees at December 31, 1995 to 734
employees at December 31, 1996.  ESE will continue to adjust its workforce to
meet business volume.

Direct salaries and other costs reflect the labor and associated benefits
costs of project and technical staff, excluding marketing time.  Such costs
consist of salaries and related fringe benefits, including employer-paid
insurance, payroll taxes, vacations, sick leave, and retirement plan
contributions.  General and administrative expenses include non-billable
employee time devoted to administration, marketing, proposals, supervision
and professional development; supplies expense; and corporate administrative
expenses.

Direct salaries and other costs decreased by $8 million or 21% in 1996, after
decreasing by 3% in 1995.  The decreases reflect ESE's adjustment of its
staffing levels to respond to changing business conditions.

General and administrative expenses remained relatively constant in 1996
after increasing by 3% in 1995.  ESE incurred significant losses on
operations closed during the year including the Denver laboratory, the
drilling operations, various consulting offices and as a result of the
general downsizing of many operations.  During 1996, severance and out-
placement costs totaled $1.5 million, the write-off of assets totaled $1.5
million, fees for outside consulting and for technology marketing rights were
$.7 million and other similar charges totaled $.6 million.

Depreciation and amortization expense declined by 10% in 1996 and by 4% in
1995 primarily due to the full amortization in early 1995 of a non-compete
agreement associated with the acquisition of ESE and an increase in fully
depreciated assets.  Amortization expense continues for the Cost in Excess of
Net Assets of Acquired Businesses, which is being amortized over 40 years.

Interest expense decreased by $.7 million or 35% in 1996 after remaining
relatively constant in 1995 due to reduced borrowings from ESE's line of
credit.

In September 1996 ESE sold Ordnance/Explosives Environmental Services, Inc.
(OES), one of its wholly-owned subsidiaries. OES completed a major contract
in 1996, but was unsuccessful in winning sufficient contracts to maintain its
profitability.  The sale of OES resulted in an immaterial loss.

In 1997, management will continue to evaluate ESE's role in QST's and
CILCORP's business strategy.  ESE's future business activity and
profitability will continue to be impacted by the level of demand for its
services, which is affected by government funding levels, the enforcement of
various federal and state statutes and regulations dealing with the
environment and the use, control, disposal, and clean-up of hazardous wastes.
The market for ESE's services is highly competitive; however, no single
entity currently dominates the environmental and engineering consulting
services marketplace.  ESE also expects to provide certain technical services
in support of QST's energy-related business strategy.

OTHER BUSINESSES

The following table summarizes Other Businesses revenue and expenses.  Other
Businesses results include income earned and expenses incurred at the Holding
Company, CIM, CVI and non-operating interest income of CILCO.

<TABLE>
<CAPTION>
Components of Other Businesses
Net Income (Loss)                     1996          1995          1994
                                               (In thousands)
<S>                                <C>            <C>            <C>
Revenue:
Leveraged lease revenue             $5,933        $ 6,224        $ 6,907
Other revenue                        2,572          3,242          4,063
                                    ------        -------        -------
Total revenue                        8,505          9,466         10,970
                                    ------        -------        -------
Expenses:                                                  
Operating expenses                  11,657          5,064          5,527
Depreciation and                                           
amortization                           198            203            214
Interest expense                     3,411          4,227          3,624
Income and other taxes              (3,076)           308            123
                                    ------        -------        -------
Total expenses                      12,190          9,802          9,488
                                    ------        -------        -------
Other businesses net income                                
  (loss)                           $(3,685)        $ (336)       $ 1,482
                                   =======         =======       =======
</TABLE>

Leveraged lease revenues declined by 5% in 1996.  Under generally accepted
accounting principles pertaining to leveraged leases,  revenues decline as the
lease portfolio matures.  During 1997 and future years, CIM expects leveraged
lease revenues to decrease, absent any investment in new leases.

Other revenues decreased in 1996 due to a $1.3 million pre-tax loss resulting
from a write-down of CIM Energy Investments Inc.'s (CEII) investment in the
Energy Investors Fund, L.P.  CEII, a subsidiary of CIM, holds a 3% limited
partnership interest in this fund, which invests in non-regulated, non-utility
facilities for the production of electricity or thermal energy.  CIM's total
investment in this fund was $5 million.  Increased revenue from CILCORP Energy
Services Inc. (CESI), a subsidiary of CVI, from the start and expansion of
several business programs in 1996 partially offset this loss.  These business
programs include the sale of carbon monoxide sensors to utilities other than
CILCO for resale to their customers and the sale of outdoor lighting to
commercial businesses.

Operating expenses increased in 1996 primarily due to higher professional
service fees related to corporate repositioning activities at the Holding
Company and expenses related to the Caterpillar alliance (see Competition).
Also contributing to the increase were higher operating expenses related to
the leveraged lease investment portfolio in 1996 compared to 1995.

Interest expense decreased in 1996 due to lower average debt balances.

Income and other taxes decreased in 1996 primarily due to lower pre-tax
earnings.
<PAGE>
Management's Report
To the Stockholders of CILCORP Inc.:

Management has prepared the accompanying financial statements and notes for
CILCORP Inc. and its consolidated subsidiaries in accordance with generally
accepted accounting principles.  Estimates and judgments used in developing
these statements are the responsibility of management.  Financial data presented
throughout this report is consistent with these statements.

CILCORP Inc. maintains a system of internal accounting controls which management
believes is adequate to provide reasonable assurance as to the integrity of
accounting records and the protection of assets.  Such controls include
established policies and procedures, a program of internal audit and the careful
selection and training of qualified personnel.

The financial statements have been audited by CILCORP's independent public
accountants, Arthur Andersen LLP.  Their audit was conducted in accordance with
generally accepted auditing standards and included an assessment of selected
internal accounting controls only to determine the scope of their audit
procedures.  The report of the independent public accountants is contained in
this annual report.

The Audit Committee of the Board of Directors, consisting solely of outside
directors, meets periodically with the independent public accountants, internal
auditors and management to review accounting, auditing, internal accounting
control, and financial reporting matters.  The independent public accountants
have direct access to the Audit Committee.  The Audit Committee meets separately
with the independent public accountants.



R. O. Viets
President and Chief Executive Officer



T. D. Hutchinson
Controller

Report of Independent Public Accountants
To the Stockholders of CILCORP Inc.:

We have audited the accompanying consolidated balance sheets of CILCORP Inc. (an
Illinois corporation) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, cash flows, stockholders' equity and
segments of business for each of the three years in the period ended December
31, 1996.  These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CILCORP Inc. and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.



Arthur Andersen LLP
Chicago, Illinois
January 27, 1997

<PAGE>
<TABLE>
Consolidated Statements of Income
CILCORP Inc. and Subsidiaries
<CAPTION>
For the Years Ended December 31       1996         1995          1994
                                (In thousands except per share amounts)
<S>                                <C>          <C>          <C>
Revenue:
Electric                           $322,785     $326,198     $313,085
Gas                                 195,770      151,546      148,285
Non-Regulated Energy and Energy                              
  Services                           14,835       --           --
Environmental and Engineering                                
   Services                          86,497      127,530      132,799
Other Businesses                      8,505        9,466       10,970
                                   --------     --------     --------
   Total                            628,392      614,740      605,139
                                   --------     --------     --------
Operating Expenses:                                          
Fuel for Generation and                                      
   Purchased Power                  102,930      106,588      106,617
Gas Purchased for Resale            121,687      68,948       78,696
Other Operations and Maintenance    225,475      243,043      234,323
Disallowed Plant Cost of                                     
   Regulated Subsidiary               --           --           7,522
Depreciation and Amortization        65,726       63,326       61,143
State and Local Revenue Taxes        22,004       20,866       20,485
Other Taxes                          15,277       16,844       16,640
                                   --------     --------     --------
   Total                            553,099      519,615      525,426
                                   --------     --------     --------
Fixed Charges and Other:                                     
Interest Expense                     29,068       29,861       26,341
Preferred Stock Dividends                                    
   of Subsidiary                      3,188        3,299        2,980
Allowance for Funds Used During                              
   Construction                         (90)        (514)      (1,040)
Other                                   679          623          666
                                   --------     --------     --------
   Total                             32,845       33,269       28,947
                                   --------     --------     --------
Income Before Income Taxes           42,448       61,856       50,766
Income Taxes                         14,505       23,274       18,180
                                   --------     --------     --------
   Net Income Available for                                  
      Common Stockholders          $ 27,943     $ 38,582     $ 32,586
                                   ========     ========     ========
Average Common Shares                                                 
   Outstanding                       13,480       13,147       13,026
                                   ========     ========     ========
   Net Income Per Common Share        $2.07       $2.93        $2.50
                                   ========     ========     ========
   Dividends Per Common Share         $2.46       $2.46        $2.46
                                   ========     ========     ========
<FN>
The accompanying Notes to Financial Statements are an integral part of these
statements.
</TABLE>

<PAGE>
<TABLE>
Consolidated Balance Sheets
CILCORP Inc. and Subsidiaries
<CAPTION>
Assets (As of December 31)                                   1996          1995
                                                             (In thousands)
<S>                                                      <C>          <C>
Current Assets:                                                                 
Cash and Temporary Cash Investments                       $   4,941    $  17,100
Receivables, Less Reserves of $2,600 and $2,223              78,309       68,479
Accrued Unbilled Revenue                                     39,851       42,842
Fuel, at Average Cost                                         7,643       11,596
Materials and Supplies, at Average Cost                      15,126       16,963
Gas in Underground Storage, at Average Cost                  24,723       13,592
Prepayments and Other                                        11,614       14,921
                                                         ----------   ----------
     Total Current Assets                                   182,207      185,493
                                                         ----------   ----------
Investments and Other Property:                                                 
Investment in Leveraged Leases                              133,030      127,141
Other Investments                                            21,807        7,316
                                                         ----------   ----------
   Total Investments and Other Property                     154,837      134,457
                                                         ----------   ----------
Property, Plant and Equipment:                                                  
Utility Plant, at Original Cost                                                 
   Electric                                               1,186,110    1,142,945
   Gas                                                      393,246      379,985
                                                         ----------   ----------
                                                          1,579,356    1,522,930
Less - Accumulated Provision for Depreciation               724,398      682,574
                                                         ----------   ----------
                                                            854,958      840,356
Construction Work in Progress                                15,092       44,749
Other, Net of Depreciation                                   21,554       25,416
                                                         ----------   ----------
     Total Property, Plant and Equipment                    891,604      910,521
                                                         ----------   ----------
Other Assets:                                                                   
Cost in Excess of Net Assets of Acquired Businesses,                            
  Net of Accumulated Amortization of $4,997 and $4,293       23,141       23,845
Other                                                        33,904       24,987
                                                         ----------   ----------
     Total Other Assets                                      57,045       48,832
                                                         ----------   ----------
     Total Assets                                        $1,285,693   $1,279,303
                                                         ==========   ==========
<FN>
The accompanying Notes to Financial Statements are an integral part of these balance
sheets.
</TABLE>

<PAGE>
<TABLE>
Consolidated Balance Sheets
CILCORP Inc. and Subsidiaries
<CAPTION>
Liabilities and Stockholders' Equity (As of December 31)
                                                          1996               1995
                                                              (In thousands)
 <S>                                                   <C>            <C>
Current Liabilities:
Current Portion of Long-Term Debt                      $   23,057     $    19,052
Notes Payable                                              27,900          47,100
Accounts Payable                                           63,434          44,550
Accrued Taxes                                               8,801           5,035
Accrued Interest                                           10,711          10,059
Purchased Gas Adjustment Over-Recoveries                      601           1,987
Other                                                      22,867          15,259
                                                       ----------      ----------
     Total Current Liabilities                            157,371         143,042
                                                       ----------      ----------
Long-Term Debt                                            320,666         344,113
                                                       ----------      ----------
Deferred Credits and Other Liabilities:                                          
Deferred Income Taxes                                     235,239         241,603
Regulatory Liability of Regulated Subsidiary               68,565          62,714
Deferred Investment Tax Credit                             22,801          24,485
Other                                                      46,726          35,248
                                                       ----------      ----------
     Total Deferred Credits                               373,331         364,050
                                                       ----------      ----------
Preferred Stock of Subsidiary                              66,120          66,120
                                                       ----------      ----------
Stockholders' Equity: (See Statements on page 35)                                
Common Stock, no par value; Authorized                                           
   50,000,000 shares - Outstanding 13,610,680 and                                
   13,335,606 shares                                      190,760         179,330
Retained Earnings                                         177,445         182,648
                                                       ----------      ----------
     Total Stockholders' Equity                           368,205         361,978
                                                       ----------      ----------
     Total Liabilities and Stockholders' Equity        $1,285,693      $1,279,303
                                                       ==========      ==========
<FN>
The accompanying Notes to Financial Statements are an integral part of these balance
sheets.
</TABLE>
<PAGE>
<TABLE>
Statements of Segments of Business
CILCORP Inc. and Subsidiaries
<CAPTION>
Operating Information For the Years Ended December 31
                                   1996           1995           1994
                                           (In thousands)
<S>                               <C>           <C>            <C>
Regulated Utility Segment:
Electric Operations                                                         
Revenue                           $322,785      $326,198       $313,085
Expenses                           270,672       277,429        263,462
                                  --------      --------       --------
Operating Income                    52,113        48,769         49,623
Income Taxes                        19,576        17,975         19,925
                                  --------      --------       --------
Operating Income Before                                                     
  Income Taxes                    $ 71,689      $ 66,744       $ 69,548
                                  ========      ========       ========
Depreciation and Amortization     $ 42,530      $ 40,665       $ 39,130
                                  ========      ========       ========
Capital Expenditures              $ 28,032      $ 45,466       $ 66,537
                                  ========      ========       ========
Gas Operations                                                              
Revenue                           $195,770      $151,546       $148,285
Expenses                           178,205       136,767        139,401
                                  --------      --------       --------
Operating Income                    17,565        14,779          8,884
Income Taxes                         6,972         5,292          1,564
                                  --------      --------       --------
Operating Income Before                                                     
 Income Taxes                     $ 24,537      $ 20,071       $ 10,448
                                  ========      ========       ========
Depreciation and  Amortization                                              
                                  $ 17,134      $ 16,100       $ 15,219
                                  ========      ========       ========
Capital Expenditures              $ 15,529      $ 24,043       $ 24,867
                                  ========      ========       ========
</TABLE>
<TABLE>
<CAPTION>
Major Customer For the Years Ended December 31
                             1996              1995               1994
<S>                   <C>         <C>     <C>       <C>      <C>       <C>
Caterpillar Inc.                                                           
Electric Revenue      $37,724     11.7%   $40,109   12.3%   $41,422   13.2%
Gas Revenue             1,053       .5%     1,022     .7%     1,719    1.2%
                      -------     -----   -------    ----   -------    ----
     Total            $38,777      7.5%   $41,131    8.6%   $43,141    9.4%
                      =======     =====   =======    ====   =======    ====
</TABLE>
<TABLE>
<CAPTION>

Regulated Utility Identifiable Assets as of December 31
                                   1996            1995          1994
<S>                             <C>            <C>            <C>
Electric                        $  721,468     $  735,463     $  718,431
Gas                                292,925        273,428        260,070
Other Utility Assets*               20,593         46,354         38,505
                                ----------     ----------     ----------
     Total Utility Assets       $1,034,986     $1,055,245     $1,017,006
                                ==========     ==========     ==========
<FN>
*Other investments, miscellaneous accounts receivable, prepaid assets,
 deferred pension costs, and unamortized debt, discount, and expense
The accompanying Notes to Financial Statements are an integral part of
these statements.
</TABLE>
<PAGE>
<TABLE>
Non-Regulated Energy and Energy Services Segment
For the Year Ended December 31                               1996
                                                        (In thousands)
<S>                                                       <C>
Revenue                                                   $ 14,835
Expenses                                                    21,463
                                                          --------
Loss Before Income Taxes                                  $ (6,628)
                                                          ========
Capital Expenditures                                      $  2,447
                                                          ========
</TABLE>
<TABLE>
Non-Regulated Energy and Energy Services Identifiable
Assets as of December 31                                     1996
                                                        (In thousands)
<S>                                                       <C>
Accounts Receivable and Unbilled Revenue                  $ 11,991
Cash and Temporary Cash Investments                            470
Property, Plant and Equipment                                2,385
Other Assets                                                   444
                                                          --------
Total Non-Regulated Energy and Energy Services Assets     $ 15,290
                                                          ========
</TABLE>
<TABLE>
Environmental and Engineering Services Segment
<CAPTION>
For the Years Ended December 31          1996          1995       1994
                                                  (In thousands)
<S>                                      <C>          <C>         <C>
Revenue                                  $ 86,497     $127,530    $132,799
Operating Expenses                         94,827      124,668     127,802
                                         --------     --------    --------
     Operating Income (Loss) Before                            
        Income Taxes                     $ (8,330)    $  2,862    $  4,997
                                         ========     ========    ========
Depreciation and Amortization            $  5,069     $  5,646    $  5,867
                                         ========     ========    ========
Capital Expenditures                     $    593     $  4,537    $  4,358
                                         ========     ========    ========
</TABLE>
<TABLE>
Environmental and Engineering Services
<CAPTION>
Identifiable Assets as of December 31       1996             1995        1994
<S>                                       <C>             <C>          <C>
Property, Plant and Equipment             $16,494         $21,961      $22,254
Cost in Excess of Net Assets of                                               
   Acquired Businesses, Net of                                                
   Amortization                            23,141          23,845       24,548
Accounts Receivable and Unbilled                                              
   Revenue                                 28,825          37,238       42,199
Cash and Temporary Cash                                                       
  Investments                               2,130              --           --
Other Assets*                               8,612           4,908        4,463
                                          -------         -------      -------
   Total Environmental and                                                    
    Engineering Services Assets           $79,202         $87,952      $93,464
                                          =======         =======      =======
<FN>
*Real estate held for resale and other current assets
</TABLE>
<TABLE>
Other Businesses Segment
<CAPTION>
For the Years Ended December 31           1996           1995         1994
<S>                                       <C>            <C>          <C>
Revenue                                   $ 8,505        $ 9,466      $10,970
Expenses                                   15,266          9,494        9,365
                                          -------        -------      -------
     Income (Loss) Before                                                      
       Income Taxes                       $(6,761)        $  (28)     $ 1,605
                                          =======        =======      =======
</TABLE>
<TABLE>
<CAPTION>
Other Businesses Identifiable
Assets as of December 31               1996          1995           1994
<S>                                   <C>           <C>           <C>
Leveraged Leases                      $133,030      $127,140      $120,961
Cash and Temporary Cash                                                   
   Investments                             680           544         1,179
Other Assets                            22,505         8,422         5,774
                                      --------      --------      --------
  Total Other Businesses Assets       $156,215      $136,106      $127,914
                                      ========      ========      ========
<FN>
The accompanying Notes to Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
CILCORP Inc. and Subsidiaries
<CAPTION>
For the Years Ended December 31            1996          1995            1994
                                                     (In thousands)
<S>                                     <C>           <C>           <C>
Cash Flows from Operating Activities:
Net Income Before Preferred Dividends   $ 31,131      $ 41,881      $ 35,566
                                        --------      --------      --------
Adjustments to Reconcile Net Income to                              
   Net Cash Provided by Operating                     
   Activities:                                        
   Non-Cash Lease & Investment Income     (4,297)       (6,224)       (7,121)
   Depreciation and Amortization          65,726        63,326        61,143
   Disallowed Plant Cost of Regulated                               
     Subsidiary                            --            --            7,522
   Deferred Income Taxes, Investment                                
     Tax Credit and Regulatory                                      
     Liability of Subsidiary, Net         (2,197)       (4,188)        5,745
Changes in Operating Assets and                                     
   Liabilities:
   (Increase) Decrease in Accounts                                  
      Receivable and Accrued Unbilled                               
      Revenue                             (6,839)      (15,068)          276
   (Increase) Decrease in Inventories     (5,341)        6,829           565
   Increase (Decrease) in Accounts                                  
     Payable                              18,884        (7,402)        4,284
   (Increase) Decrease in Real Estate                               
     Held for Resale                      (4,576)          (60)       (2,351)
   (Increase) Decrease in Other Assets    (1,038)        9,419        (2,158)
   Increase in Other Liabilities          10,923         2,276         6,885
                                        --------      --------      --------
   Total Adjustments                      71,245        48,908        74,790
                                        --------      --------      --------
   Net Cash Provided by Operating                                   
      Activities                         102,376        90,789       110,356
                                        --------      --------      --------
Cash Flows from Investing Activities:                               
Additions to Plant                       (46,741)      (74,046)      (95,762)
Purchase of Long-Term Investments         (4,713)       (1,617)          (11)
Proceeds from Sale of Long-Term                                     
   Investments                               --            500         4,667
Other                                        461        (8,836)       (6,559)
                                         --------      --------      --------
     Net Cash (Used in) Investing                                   
Activities                               (50,993)      (83,999)      (97,665)
                                        --------      --------      --------
Cash Flows from Financing Activities:                               
Net Increase (Decrease) in Short-Term                               
   Debt                                  (19,200)       17,700        (1,800)
Proceeds from Issuance of Long-Term                                 
   Debt                                   --            36,473        22,000
Repayment of Long-Term Debt              (19,442)      (21,203)      --
Common Dividends Paid                    (33,142)      (32,308)      (32,063)
Preferred Dividends Paid                  (3,188)       (3,299)       (2,980)
Common Stock Issued                       11,430        11,343         2,325
Preferred and Common Stock Issuance                                 
   Costs                                     --            --             (9)
                                        --------      --------      --------
     Net Cash Provided by (Used in)                                 
         Financing Activities            (63,542)        8,706       (12,527)
                                        --------      --------      --------
Net Increase (Decrease) in Cash and                                 
   Temporary Cash Investments            (12,159)       15,496           164
Cash and Temporary Cash Investments                                 
   at Beginning of Year                   17,100         1,604         1,440
                                        --------      --------      --------
   Cash and Temporary Cash Investments                              
      at End of Year                     $ 4,941      $ 17,100      $  1,604
                                        ========      ========      ========
<FN>
The accompanying Notes to Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
CILCORP Inc. and Subsidiaries
<CAPTION>
                                        Common Stock           Retained
                                   Shares          Amount      Earnings      Total
                                       (In thousands except share amounts)
<S>                                <C>             <C>        <C>          <C>
Balance at December 31, 1993       12,971,501      $165,662   $176,214     $341,876
Common Stock Issued                    64,255         2,325                   2,325
Cash Dividend Declared on                                                 
   Common Stock ($2.46 per                                                
   share)                                                      (32,063)     (32,063)
Preferred and Common Stock                                                
   Issuance Costs                                                   (9)          (9)
Net Income                                                      32,586       32,586
                                   ----------      --------   --------     --------
Balance at December 31, 1994       13,035,756      $167,987   $176,728     $344,715
Common Stock Issued                   299,850        11,343                  11,343
Cash Dividend Declared on                                                 
   Common Stock ($2.46 per                                                 
   share)                                                      (32,308)     (32,308)
Additional Minimum Liability of                                           
  Non-Qualified Pension Plan at                                           
  December 31, 1995, net of                                               
  $233 taxes                                                      (354)        (354)
Net Income                                                      38,582       38,582
                                   ----------      --------   --------     --------
Balance at December 31, 1995       13,335,606      $179,330   $182,648     $361,978
                                   ----------      --------   --------     --------
Common Stock Issued                   275,074        11,430                  11,430
Cash Dividend Declared on                                                 
   Common Stock ($2.46 per                                                
   share)                                                      (33,142)     (33,142)
Additional Minimum Liability of                                           
  Non-Qualified Pension Plan at                                           
  December 31, 1996, net of                                               
  $3 taxes                                                          (4)          (4)
Net Income                                                      27,943       27,943
                                   ----------      --------   --------     --------
Balance at December 31, 1996       13,610,680      $190,760   $177,445     $368,205
                                   ==========      ========   ========     ========
<FN>
The accompanying Notes to Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of CILCORP Inc.
(CILCORP or the Holding Company), Central Illinois Light Company (CILCO), QST
Enterprises Inc. (QST), Environmental Science & Engineering, Inc. (ESE) and
CILCORP's other subsidiaries (collectively, the Company) after elimination of
significant intercompany transactions.  Formerly a CILCORP first-tier
subsidiary, ESE became a subsidiary of QST effective October 29, 1996.  Prior
year amounts have been reclassified on a basis consistent with the 1996
presentation.

CILCORP is an investor-owned public utility holding company.  CILCO, the
Company's principal business subsidiary, is engaged in the generation,
transmission, distribution and sale of electric energy in an area of
approximately 3,700 square miles in central and east-central Illinois, and
the purchase, distribution, transportation and sale of natural gas in an
area of approximately 4,500 square miles in central and east-central
Illinois.  QST has three first-tier subsidiaries.  QST Energy Inc. provides
energy and energy-related services to a broad spectrum of retail and
wholesale customers.  QST Communications Inc. provides fiber optic and
advanced Internet-based communication services and products.  ESE provides
engineering and environmental consulting, analysis and laboratory services
and acquires and remediates environmentally impaired property for resale.
Other CILCORP first-tier subsidiaries are CIM, which manages the Company's
investment portfolio and CVI, which pursues investment opportunities in new
ventures.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.

REGULATION

CILCO is a public utility subject to regulation by the Illinois Commerce
Commission and the Federal Energy Regulatory Commission with respect to
accounting matters, and maintains its accounts in accordance with the
Uniform System of Accounts prescribed by these agencies.

As a regulated public utility, CILCO is subject to the provisions of
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS 71).  Regulatory increases
and decreases, respectively, of assets and liabilities represent probable
future increases and decreases, respectively, of revenues to CILCO
resulting from the ratemaking action of regulatory agencies.  Regulatory
liabilities, consisting of deferred tax items, are approximately
$68.6 million and $62.7 million at December 31, 1996 and 1995, respectively
(see Note 2).  At December 31, 1996 and 1995, the regulatory assets
included on the Consolidated Balance Sheets were as follows:



<TABLE>
<CAPTION>
                                                       1996       1995
                                                       (In thousands)
<S>                                                  <C>          <C>
Included in prepayments and other:                                      
    Fuel and gas cost adjustments                    $ 9,658     $ 5,444
    Coal tar remediation cost - estimated                               
            current                                    1,071       1,500
    Gas transition costs                               1,022       2,268
                                                     -------     -------
          Current costs included in                                     
            prepayments and other                     11,751       9,212
                                                     -------     -------
Included in other assets:                                               
    Coal tar remediation cost, net of                                   
      recoveries                                       2,839       4,222
    Regulatory tax asset                               4,777       3,232
    Gas transition costs                                  --       1,656
    Deferred gas costs                                 4,330       3,207
    Unamortized loss on reacquired debt                5,572       6,029
                                                     -------     -------
         Future costs included in other assets        17,518      18,346
                                                     -------     -------
              Total regulatory assets                $29,269     $27,558
                                                     =======     =======
</TABLE>

If a portion of CILCO's operations is no longer subject to the provisions of
SFAS 71, a write-off of related regulatory assets and liabilities would be
required, unless some form of transition cost recovery continues through
rates established and collected for CILCO's remaining regulated operations.
In addition, CILCO would be required to determine any impairment to the costs
recorded for deregulated plant and inventory assets.

OPERATING REVENUES, FUEL COSTS AND COST OF GAS

Electric, gas, and non-regulated energy and energy services revenues include
service provided but unbilled at year end.  Substantially all electric rates
and gas system sales rates of CILCO include a fuel adjustment clause and a
purchased gas adjustment clause, respectively.  These clauses provide for the
recovery of changes in electric fuel costs, excluding coal transportation, and
changes in the cost of gas on a current basis in billings to customers.  CILCO
adjusts the cost of fuel and cost of gas to recognize over or under recoveries
of allowable costs.  The cumulative effects are deferred on the Balance Sheets
as a current asset or current liability (see Regulation, above) and adjusted
by refunds or collections through future billings to customers.

CONCENTRATION OF CREDIT RISK

CILCO, as a public utility, must provide service to customers within its
defined service territory and may not discontinue service to residential
customers when certain weather conditions exist.  CILCO continually reviews
customers' creditworthiness and requests deposits or refunds deposits based on
that review.  At December 31, 1996, CILCO had net receivables of
$43.6 million, of which approximately $9.2 million was due from its major
industrial customers.

See Note 6 for a discussion of receivables related to CILCORP Investment
Management Inc.'s leveraged lease portfolio.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of Cash and Temporary Cash Investments, Other Investments,
Preferred Stock with Mandatory Redemption and Notes Payable approximates fair
value.  The estimated fair value of the Company's Long-Term Debt, including
current maturities, was $365 million at December 31, 1996, and $399 million at
December 31, 1995, based on current market interest rates for other companies
with comparable credit ratings, capital structures, and size.

ENVIRONMENTAL AND ENGINEERING SERVICES REVENUES

ESE performs professional environmental and engineering consulting and
analytical laboratory services under time and material, cost-plus and fixed-
price contracts.  These service revenues include amounts for services provided
but unbilled at year end.  Revenues from time and material and cost-plus
contracts are recognized as costs are incurred.  Revenues from fixed-price
contracts are recognized under the percentage-of-completion method.

DEPRECIATION AND MAINTENANCE

Provisions for depreciation of utility property for financial reporting
purposes are based on straight-line composite rates.  The annual provisions
for utility plant depreciation, expressed as a percentage of average
depreciable utility property, were 3.8% and 4.6% for electric and gas,
respectively, for each of the last three years.  Utility maintenance and
repair costs are charged directly to expense.  Renewals of units of property
are charged to the utility plant account, and the original cost of depreciable
property replaced or retired, together with the removal cost less salvage, is
charged to the accumulated provision for depreciation.

Non-utility property is depreciated over estimated lives ranging from 5 to 40
years.

COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES

Cost in Excess of Net Assets of Acquired Businesses is being amortized using
the straight-line method over 40 years.  The amortization is related to the
acquisition of ESE and is a component of depreciation and amortization expense
on the Consolidated Statements of Income.

INCOME TAXES

The Company follows a policy of comprehensive interperiod income tax
allocation.  Investment tax credits related to utility property have been
deferred and are being amortized over the estimated useful lives of the
related property.  CILCORP and its subsidiaries file a consolidated federal
income tax return.  Income taxes are allocated to the individual companies
based on their respective taxable income or loss.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The Company considers all highly liquid debt instruments purchased with a
remaining maturity of three months or less to be cash equivalents for purposes
of the Consolidated Statements of Cash Flows.

Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
                                  1996          1995        1994
                                        (In thousands)
<S>                             <C>           <C>          <C>
Interest                        $28,988       $27,615      $27,663
Income taxes                     13,572        32,673       13,103
                                -------       -------      -------
</TABLE>

COMPANY-OWNED LIFE INSURANCE POLICIES

The following amounts related to Company-owned life insurance contracts,
issued by one major insurance company, are included in Other Investments:
<TABLE>
<CAPTION>
                                               1996       1995
                                               (In thousands)
<S>                                          <C>       <C>
Cash surrender value of contracts            $40,076   $35,135
Borrowings against contracts                 (37,948)  (33,211)
                                            -------    -------
   Net investment                            $ 2,128   $ 1,924
                                            =======    =======
</TABLE>
Interest expense related to borrowings against Company-owned life insurance,
included in "Other" on the Consolidated Statements of Income, was
$2.7 million, $2.3 million and $2 million  for 1996, 1995 and 1994,
respectively.

NOTE 2 - INCOME TAXES

The Company uses the liability method to account for income taxes.  Under the
liability method, deferred income taxes are recognized at currently enacted
income tax rates to reflect the tax effect of temporary differences between
the financial reporting basis and the tax basis of assets and liabilities.
Temporary differences occur because the income tax law either requires or
permits certain items to be reported on the Company's income tax return in a
different year than they are reported in the financial statements.  CILCO has
recorded a regulatory asset and liability to account for the effect of
expected future regulatory actions related to unamortized investment tax
credits, income tax liabilities initially recorded at tax rates in excess of
current rates, the equity component of Allowance for Funds Used during
Construction and other items for which deferred taxes had not previously been
provided.  The temporary differences related to the consolidated deferred
income tax asset and liability at December 31, 1996, 1995, and 1994 were as
follows:
<TABLE>
<CAPTION>
December 31                           1996            1995             1994
                                            (In thousands)
<S>                                 <C>             <C>              <C>
Deferred tax assets:
   Regulatory tax liabilities       $68,565         $62,714          $61,742
   Other                             16,452          15,171           11,560
                                    --------        --------         --------
                                    $85,017         $77,885          $73,302
                                    --------        --------         --------
<FN>

</TABLE>
<TABLE>
<CAPTION>
December 31                             1996              1995             1994
                                            (In thousands)
<S>                                 <C>               <C>               <C>
Deferred tax liabilities:
   Property, including                                                  
     allowance for funds used                                           
     during construction            $214,356          $217,049          $216,304
   Leveraged leases                   97,964            93,566            88,308
   Regulatory tax assets               4,777             3,232             1,745
   Other                               3,159             5,641            13,760
                                    --------          --------          --------
                                    $320,256          $319,488          $320,117
                                    --------          --------          --------
   Net accumulated deferred income                                      
     tax liability                 $ 235,239         $ 241,603          $246,815
                                    ========          ========          ========
<FN>

The following table reconciles the change in the accumulated deferred income
tax liability to the deferred income tax expense included in the income
statement:

</TABLE>
<TABLE>
<CAPTION>
 December 31                            1996           1995
                                            (In thousands)
<S>                                 <C>               <C>
   Net change in deferred income                      
     tax liability per above                          
     table                          $(6,364)          $(5,212)
    Change in tax effects of income                    
     tax related regulatory assets                    
     and liabilities                  4,306              (515)
   Equity adjustment relating to                      
     early retirement program             3               233
   Other                                946               117
                                    --------          --------
   Deferred income tax benefit                        
     for the period                 $(1,109)          $(5,377)
                                    ========          ========
<FN>

Income tax expenses were as follows:

</TABLE>
<TABLE>
<CAPTION>
December 31                      1996          1995         1994
                                             (In thousands)
<S>                           <C>           <C>            <C>
Current income taxes
Federal                       $ 15,129      $25,024        $11,825
State                            2,169        5,320          2,238
                               -------       -------        -------
  Total current taxes           17,298       30,344         14,063
                               -------       -------        -------
Deferred income taxes, net                                 
Property-related deferred                                  
  income taxes                  (2,346)         516         (1,094)
Leveraged leases                 4,398        6,341          8,179
Unbilled revenue                   425       (2,982)           222
Gas take-or-pay settlements       (706)        (751)        (1,244)
Environmental remediation                                  
  costs                           (642)         642            253
Pension expenses                (1,726)      (6,673)          (145)
Customer advances                  (40)      (1,467)          (143)
Other                             (472)      (1,003)          (218)
                               --------      -------        -------
   Total deferred income                                   
           taxes, net           (1,109)      (5,377)         5,810
                               --------      -------        -------
Investment tax credit                                      
  amortization                  (1,684)      (1,693)        (1,693)
                               --------      -------        -------
   Total income tax                                        
     provisions                $14,505      $23,274        $18,180
                              ========      =======        =======
<FN>
Total deferred income taxes, net, includes deferred state income taxes of
$538,000, $(67,000) and $1,801,000 for 1996, 1995 and 1994, respectively.
</TABLE>
The following table represents a reconciliation of the effective tax rate with
the statutory federal income tax rate.
<TABLE>
<CAPTION>  Years Ended December 31               1996         1995        1994
<S>                                            <C>           <C>         <C>
Statutory federal income tax                   35.0%         35.0%       35.0%
                                               -----          -----      -----
Equity component of AFUDC not subject to                             
  taxation                                        --          (.1)        (.4)
Depreciation differences for which                                   
  deferred taxes have not been provided          (3.4)        (2.0)      (1.6)
Amortization of investment tax credit            (4.0)        (2.7)      (3.3)
State income taxes                                4.8          5.9        5.3
Excess of book over tax basis of assets            .6           .4         .5
Preferred dividends of subsidiary and                                
  other permanent differences                     1.9          1.1        2.3
Tax provision adjustment                          (.4)          .5       (1.3)
Civil fine                                        --           --          .7
Other differences                                 (.3)         (.5)      (1.4)     
                                                 -----        -----      ----
   Total                                          (.8)         2.6         .8
                                               -----          -----       ----
Effective income tax rate                      34.2%          37.6%      35.8%
                                               =====          ====        ====
</TABLE>

NOTE 3 - POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS

POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE

CILCO has recorded a liability of approximately $1.4 million and $.9 million at
December 31, 1996 and 1995, respectively, for benefits other than pensions or
health care provided to former or inactive employees.

PENSION BENEFITS

Substantially all of CILCO's full-time employees, including those assigned to
the Holding Company, are covered by trusteed, non-contributory defined benefit
pension plans.  Benefits under these qualified plans reflect the employee's
years of service, age at retirement and maximum total compensation for any
consecutive sixty-month period prior to retirement.  CILCO also has an unfunded
nonqualified plan for certain employees.

Pension costs for the past three years were charged as follows:
<TABLE>
<CAPTION>                                 1996         1995        1994
                                                  (In thousands)
<S>                                     <C>         <C>           <C>
Operating expenses                      $ 9,700     $15,528       $2,637
Utility plant and other                     922         994        1,017
                                        -------      ------       ------
   Net pension costs                    $10,622     $16,522       $3,654
                                        =======      ======       ======
</TABLE>

Provisions for pension expense reflect the use of the projected unit credit
actuarial cost method.  At December 31, 1996 and 1995, CILCO recognized an
additional minimum liability on the Balance Sheets for the plan in which the
accumulated benefit obligation exceeds the fair value of plan assets.

The components of net periodic pension costs follows:
<TABLE>
<CAPTION>                                              1996         1995
                                                        (In thousands)
<S>                                               <C>           <C>
                                                                 
   Cost of pension benefits earned by employees   $ 4,998       $ 4,654
   Interest cost on projected benefit obligation   16,666        15,188
   Actual return on plan assets                   (34,173)      (50,816)
   Net amortization and deferral                   15,213        34,437
   Special termination benefits                     7,918        13,059
                                                  --------      --------
   Net pension costs                              $10,622      $ 16,522
                                                  =======      ========
</TABLE>

During 1996 and 1995, CILCO recognized $7.9 million and $13.1 million,
respectively, of net pension costs in accordance with Statement of Financial
Accounting Standards No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits".
These amounts represented the costs associated with additional benefits extended
in connection with voluntary early retirement programs.

Information on the funded status of plans in which assets exceed accumulated
benefits follows:
<TABLE>
<CAPTION>
Actuarial present value of benefit                     1996         1995
  obligation:                                          (In thousands)
<S>                                                <C>           <C>
   Vested benefits - employees' rights to receive                
     benefits no longer contingent upon continued                
     employment                                    $(191,301)    $(171,422)
   Non-vested benefits - employees' rights to                    
     receive benefits contingent upon continued                  
     employment                                      (11,293)      (15,266)
                                                    --------       --------
   Accumulated benefit obligation                   (202,594)     (186,688)
   Provisions for future pay increases               (30,224)      (47,058)
                                                     --------      --------
   Projected benefit obligation                     (232,818)     (233,746)
   Pension assets at fair market value               254,824       232,560
                                                    --------      --------
   Projected benefit obligation (greater) less                   
     than plan assets                                 22,006        (1,186)
   Unrecognized transition asset                      (5,787)       (6,675)
   Unrecognized prior service cost                     8,006         9,034
   Unrecognized net gain                             (33,488)       (3,338)
                                                     -------       --------
   Pension liability recorded on Balance Sheets     $ (9,263)     $ (2,165)
                                                     =======       ========
</TABLE>
Information on the funded status of the plan in which accumulated benefits
exceed assets follows:
<TABLE>
<CAPTION>
Actuarial present value of benefit                     1996           1995
  obligation:                                             (In thousands)
<S>                                                <C>           <C>
   Vested benefits - employees' rights to receive                
     benefits no longer contingent upon continued                
     employment                                    $(1,938)      $(1,792)
   Non-vested benefits - employees' rights to                    
     receive benefits contingent upon continued                  
     employment                                       (169)         (132)
                                                     ------        ------
   Accumulated benefit obligation                   (2,107)       (1,924)
   Provision for future pay increases                 (515)         (765)
                                                    ------        ------
   Projected benefit obligation                     (2,622)       (2,689)

   Pension assets at fair market value                 --           --
                                                   -------       -------
   Projected benefit obligation greater than plan                
    assets                                          (2,622)       (2,689)
   Unrecognized prior service cost                     495           536
   Unrecognized net loss                             1,111         1,352
   Additional minimum liability                     (1,091)       (1,123)
                                                    -------       -------
   Pension liability recorded on Balance Sheets    $(2,107)      $(1,924)
                                                    =======       =======
</TABLE>
<TABLE>
<CAPTION>
Significant assumptions used for calculations:      1996        1995
<S>                                                <C>         <C>
Discount rate                                      7.75%       7.25%
Expected rate of salary increase                   4.50%       4.50%
Expected long-term rate of return                  8.50%       8.50%
</TABLE>

POSTRETIREMENT HEALTH CARE BENEFITS

Provisions for postretirement benefits expenses are determined under the
accrual method of accounting.

Substantially all of CILCO's full-time employees, including those assigned to
the Holding Company, are currently covered by a trusteed, non-contributory
defined benefit postretirement health care plan.  The plan pays stated
percentages of most necessary medical expenses incurred by retirees, after
subtracting payments by Medicare or other providers and after a stated
deductible has been met.  Participants become eligible for the benefits if
they retire from CILCO after reaching age 55 with 10 or more years of service.
ESE and QST do not provide health care benefits to retired employees.

Postretirement health care benefit costs were charged as follows:
<TABLE>
<CAPTION>
                                            1996       1995       1994
                                                  (In thousands)
<S>                                        <C>        <C>         <C>
Operating expenses                         $5,096     $5,108      $5,253
Utility plant and other                     1,883      1,882       1,913
                                           ------     ------      ------
   Net postretirement health care                                       
     benefit costs                         $6,979     $6,990      $7,166
                                           ======     ======      ======
</TABLE>

Information on the plans' funded status follows:
<TABLE>
<CAPTION>
                                                  1996         1995
                                                   (In thousands)
<S>                                             <C>              <C>
Components of net postretirement health care
  benefit costs:
     Service cost - benefits attributed                  
       to service during the period             $ 1,429          $ 1,302
     Actual return on plan assets                (4,290)          (5,936)
     Interest cost on accumulated                        
       postretirement health care                        
       benefit obligation                         4,545            4,795
     Amortization of transition                          
       obligation over 18.6 years                 2,858            2,858
     Other net amortization and                          
       deferral                                   1,441            3,971
     Special termination benefits                   996              --
                                                -------          -------
     Net postretirement health care                      
       benefit costs                            $ 6,979          $ 6,990
                                                =======          =======
  Actuarial present value of                             
     accumulated postretirement health
     care benefit obligation:
     Retirees                                  $(41,287)        $(36,646)
     Other fully eligible participants           (3,904)         (12,668)
     Other active participants                  (18,079)         (22,003)
                                                 -------         -------
     Accumulated postretirement health                   
       care benefit obligation                  (63,270)         (71,317)
     Plan assets at fair value                   39,601           33,157
                                                 -------         -------
     Accumulated health care benefit                     
       obligation greater than plan                      
       assets                                   (23,669)         (38,160)
     Unrecognized actuarial gain                (13,447)            (814)
     Unrecognized transition obligation          36,013           38,871
                                                 -------         -------
     Postretirement health care benefit                  
       liability recorded on Balance                     
       Sheets                                   $(1,103)         $  (103)
                                                =======          =======
</TABLE>

For measurement purposes, the annual health care cost trend rate averaged 7.2%
for 1996; the rate was assumed to decrease gradually to 5.7% by 2025 and
remain at that level thereafter.

Increasing the assumed health care cost trend rate by 1% in each year would
increase the accumulated postretirement benefit obligation at
December 31, 1996, by $2.4 million and the aggregate of the service and
interest cost components of net postretirement health care cost for 1996 by
$211,000.  The discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1996, was 7.75% and at
December 31, 1995, was 7.25%.  The weighted average expected return on assets
net of taxes was 8.1%, where taxes are assumed to decrease return by 0.4%.

NOTE 4 - CILCORP SHAREHOLDER RETURN INCENTIVE COMPENSATION PLAN

Under the Company's Shareholder Return Incentive Compensation Plan, adopted
February 23, 1993, eligible key employees are entitled to receive shares of
the Company's common stock at the end of a performance measurement period
established by the Compensation Committee of the Company's Board of Directors
to the extent that the Company achieves pre-established financial objectives
set by the Committee for such period.  Currently, the performance period is
five years and shares are distributed based on comparisons of the Company's
total shareholder return with a peer group of pre-selected utilities.

The year-end closing price was used to value the shares outstanding at the
end of the year.

The following table is a summary of the status of the Company's Shareholder
Return Plan as of December 31, 1996, 1995, and 1994, and changes during the
years ending on those dates:

<TABLE>                              1996            1995              1994
<CAPTION>                               Market            Market            Market
                                Shares   Price    Shares   Price    Shares   Price
<S>                             <C>    <C>         <C>   <C>        <C>     <C>   
Performance Shares                                                                
Outstanding at beginning of                                                       
   year                         26,000 $42 3/8     9,000 $32 1/8    9,000   $37 1/2
Distributed                         --      --    20,000  32 1/8        --      --
Exercised                           --      --        --      --        --      --
Forfeited                       (3,333) 36 5/8    (3,000) 42 3/8        --      --
                                ------            ------             -----        
Outstanding at end of year      22,667  36 5/8    26,000  42 3/8    9,000    32 1/8
                                ======            ======             =====        
Shares distributable at                                                           
   year-end                         --                --                --
Weighted-average fair value                                                       
  of shares granted during                                                        
  the year                                  --           $32 1/8                --
</TABLE>

NOTE 5 - SHORT-TERM DEBT

Short-term debt at December 31, 1996, consisted of $18 million of Holding
Company bank borrowings and $9.9 million of CILCO commercial paper.  Short-
term debt at December 31, 1995, included $22.5 million of Holding Company
bank borrowings and $24.6 million of CILCO commercial paper.

The Holding Company had arrangements for bank lines of credit totaling
$50 million at December 31, 1996, of which $18 million was used.  These lines
were maintained by commitment fees of 1/8 of 1% per annum in lieu of
balances.  The Company also had a $5 million discretionary bank line at the
end of 1996, which was unused.

CILCO had arrangements for bank lines of credit totaling $20 million at
December 31, 1996, all of which were unused.  These lines of credit were
maintained by commitment fees of 1/20 of 1% per annum in lieu of balances.
These bank lines of credit support CILCO's issuance of commercial paper.

At December 31, 1996, ESE had a $10 million bank line of credit, of which $4.4
million was committed at year end to collateralize performance bonds issued in
connection with ESE projects.

NOTE 6 - LEVERAGED LEASE INVESTMENTS

The Company, through subsidiaries of CILCORP Investment Management Inc. (CIM),
is a lessor in seven leveraged lease arrangements under which mining
equipment, electric production facilities, warehouses, office buildings,
passenger railway equipment and an aircraft are leased to third parties.  The
economic lives and lease terms vary with the leases.  CIM's share of total
equipment and facilities cost was approximately $305 million at December 31,
1996 and 1995.

The cost of the equipment and facilities owned by CIM is partially financed by
non-recourse debt provided by lenders, who have been granted, as their sole
remedy in the event of a lessee default, an assignment of rents due under the
leases and a security interest in the leased property.  Such debt amounted to
$208 million at December 31, 1996, and $216 million at December 31, 1995.
Leveraged lease residual value assumptions, which are conservative in relation
to independently appraised residual values of the lease portfolio, are tested
on a periodic basis.  CIM's net investment in leveraged leases at December 31,
1996 and 1995 is shown below:
<TABLE>
<CAPTION>
                                                1996           1995
                                                 (In thousands)
<S>                                           <C>           <C>
Minimum lease payments receivable             $122,669      $122,713
Estimated residual value                        94,368        94,368
Less:  Unearned income                          84,007        89,940
                                              --------      --------
Investment in lease financing                                       
receivables                                    133,030       127,141
Less:  Deferred taxes arising from                                  
   leveraged leases                             97,964        93,566
                                              --------      --------
     Net investment in leveraged leases       $ 35,066      $ 33,575
                                              ========      ========
</TABLE>

NOTE 7 - PREFERRED STOCK

PREFERRED STOCK OF SUBSIDIARY
<TABLE>
<CAPTION>
At December 31                                1996             1995
                                                 (In thousands)
<S>                                          <C>               <C>
Preferred stock, cumulative
$100 par value, authorized 1,500,000 shares
   Without mandatory redemption                                       
   4.50% series - 111,264 shares             $11,126           $11,126
   4.64% series - 79,940 shares                7,994             7,994
Class A, no par value, authorized                                     
  3,500,000 shares                                                    
   Flexible auction rate - 250,000                                    
    shares (a)                                25,000            25,000
   With mandatory redemption                                          
   5.85% series - 220,000 shares              22,000            22,000
                                             -------           -------
        Total preferred stock                $66,120           $66,120
                                             =======           =======
<FN>
(a)  Dividend rates at December 31, 1996 and 1995, were 3.936% and 4.40%,
     respectively.
</TABLE>
All classes of preferred stock are entitled to receive cumulative dividends and
rank equally as to dividends and assets, according to their respective terms.

The total annual dividend requirement for preferred stock outstanding at
December 31, 1996, is $3.1 million, assuming a continuation of the auction
dividend rate at December 31, 1996, for the flexible auction rate series.

PREFERRED STOCK WITHOUT MANDATORY REDEMPTION

The call provisions of preferred stock redeemable at CILCO's option
outstanding at December 31, 1996, are as follows:


<TABLE>
<CAPTION>
Series         Callable Price Per Share (plus accrued dividends)
<S>                                <C>
4.50%                              $110
4.64%                              $102
Flexible Auction Rate              $100
</TABLE>
PREFERRED STOCK WITH MANDATORY REDEMPTION

CILCO's 5.85% Class A preferred stock may be redeemed in 2003 at $100 per share.
A mandatory redemption fund must be established on July 1, 2003.  The fund will
provide for the redemption of 11,000 shares for $1.1 million on July 1 of each
year through July 1, 2007.  On July 1, 2008, the remaining 165,000 shares
will be retired for $16.5 million.

PREFERENCE STOCK OF SUBSIDIARY, CUMULATIVE

No Par Value, Authorized 2,000,000 shares, of which none have been issued.

PREFERRED STOCK OF HOLDING COMPANY

No Par Value, Authorized 4,000,000 shares, of which none were outstanding
at December 31, 1996 and 1995.

COMMON STOCK RIGHTS

On October 29, 1996, the Board of Directors of CILCORP authorized and declared a
dividend distribution of one right for each share of common stock of the Company
to stockholders of record at November 12, 1996, and for each share of common
stock issued thereafter.  Each right gives the stockholder the right to
purchase one one-hundredth of a share of preferred stock of the Company for
$100, subject to the conditions set forth in the agreement governing the
rights plan.

NOTE 8 - LONG-TERM DEBT
<TABLE>
<CAPTION>
At December 31                                  1996           1995
                                                    (In thousands)
<S>                                          <C>            <C>
CILCO first mortgage bonds
   5 1/2% series due 1997                    $    --        $20,000
   7 1/2% series due 2007                     50,000         50,000
   8 1/5% series due 2022                     65,000         65,000
Medium-term notes                                        
   5.7% series due 1998                       10,650         10,650
   6.4% series due 2000                       30,000         30,000
   6.82% series due 2003                      25,350         25,350
   6.13% series due 2005                      16,000         16,000
   7.8% series due 2023                       10,000         10,000
   7.73% series due 2025                      20,000         20,000
Pollution control refunding bonds                        
   6.5% series F due 2010                      5,000          5,000
   6.2% series G due 2012                      1,000          1,000
   6.5% series E due 2018                     14,200         14,200
   5.9% series H due 2023                     32,000         32,000
                                            --------       --------
                                             279,200        299,200
Unamortized premium and discount on                      
  long-term debt, net                          (761)          (803)
                                            --------       --------
     Total CILCO                            $278,439       $298,397
                                            --------       --------
CILCORP Lease Management Inc. Unsecured                            
  financial institution borrowings;                                
  interest rate of 9.55%; matures in                               
  1997                                           --           3,000
CILCORP Inc.                                                                   
Unsecured medium-term notes; varying in term from                              
  2 years to 6 years; interest rates ranging from 8.33%                        
  to 9.10%                                    42,000         42,000
Other                                            227            716
                                            --------       --------
   Total long-term debt                     $320,666       $344,113
                                            ========       ========
</TABLE>

CILCO's first mortgage bonds are secured by a lien on substantially all of
its property and franchises.  Unamortized borrowing expense, premium and
discount on outstanding long-term debt are being amortized over the lives of
the respective issues.

Total consolidated maturities of long-term debt for 1998-2001 are $22 million,
$13 million, $30 million and $18 million, respectively.

The 1997 and 1996 maturities of long-term borrowings have been classified as
current liabilities.

NOTE 9 - COMMITMENTS & CONTINGENCIES

CILCO's 1997 capital expenditures are estimated to be $53.2 million, in
connection with which CILCO has normal and customary purchase commitments at
December 31, 1996.

CILCO, ESE and QST act as self-insurers for certain insurable risks resulting
from employee health and life insurance programs.

QST, through ESE Land, expects to spend $8.3 million in 1997 to acquire land
for remediation and resale ($5 million of which it expects to finance with
non-recourse debt).  Additional capital expenditures for 1997 are estimated
to be $10.6 million for QST Energy, $3.3 million for QST Com, and
$1.4 million for ESE, in connection with which QST has normal and customary
purchase commitments at December 31, 1996.

In August 1990, CILCO entered into a firm, wholesale power purchase agreement
with Central Illinois Public Service Company (CIPS).  This agreement provides
for a minimum contract delivery rate from CIPS of 80 megawatts (MW) of
capacity through May 1997, then increasing to 90 MW until the contract
expires in 1998.

In March 1995, CILCO and CIPS renegotiated a limited-term power agreement
reached in November 1992.  This agreement, which now expires in May 2009,
provides for CILCO to purchase up to 150 MW of CIPS' capacity from June 1998
through May 2002, and 50 MW from June 2002 through May 2009.  This renegotiated
agreement was subject to the ICC's final approval of CILCO's 1995 electric least
cost energy plan, which was granted on May 8, 1996.

Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations, Environmental Matters (regarding former
gas manufacturing sites) for a discussion of that item.

NOTE 10 - RATE MATTERS

In December 1994, the ICC issued a rate order designed to grant CILCO a $10.6
million, or 6.7% annual increase in gas base rate revenues.  The new rates,
designed to yield an 11.82% return on common equity and a 9.24% return on
rate base, were effective in December 1994.

In mid-1992, after a significant number of leaks were detected in CILCO's
Springfield cast iron gas distribution system, CILCO began a detailed
examination of its Springfield gas distribution system and related operating
practices and procedures.  CILCO thereafter began an aggressive program to
renew its Springfield gas cast iron main system.  This project was completed
in November 1995.

As a part of the 1994 rate order, the ICC disallowed approximately $7.5
million of CILCO's $24 million investment in the Springfield cast iron main
renewal project.  To reflect the disallowance, CILCO recorded a pre-tax
charge of approximately $7.5 million ($4.5 million after tax) against 1994
earnings.

In September 1994, CILCO entered into a federal court civil consent decree
with the US Department of Justice (DOJ) which concluded investigations by the
DOJ and US Department of Transportation (DOT) of CILCO's Springfield gas
operations.  As a part of the settlement with the DOJ, CILCO accepted
adjustments recommended by the ICC staff which resulted in a net disallowance
from CILCO's gas rate base of approximately $4.5 million of the cost of the
Springfield cast iron main renewal project.  This charge is part of the $7.5
million disallowance included in the December 1994 rate order.  In addition
to the rate base disallowance, CILCO agreed to pay an $844,000 civil fine to
the United States and agreed to reimburse the ICC, the DOT and the DOJ
$156,000 for the costs of their investigations.  CILCO also agreed to
underwrite the reasonable expense of an outside expert, selected by the ICC,
to examine CILCO's gas operations manuals and systems to ensure they are in
compliance with all applicable statutes and regulations.  The audit was
completed in October 1995 at a total cost of $356,000.

Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations, Competition and Environmental Matters
for a discussion of other gas and electric rate matters.

NOTE 11 - LEASES

The Company and its subsidiaries lease certain equipment, buildings and other
facilities under capital and operating leases.  Several of the operating
leases provide that the Company pay taxes, maintenance and other occupancy
costs applicable to these premises.

Minimum future rental payments under non-cancellable capital and operating
leases having remaining terms in excess of one year as of December 31, 1996,
are $26.8 million in total.  Payments due during the years ending December 31,
1997, through December 31, 2001, are $7.8 million, $6.9 million, $5.4 million,
$3.4 million and $2.5 million, respectively.

NOTE 12 - DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS

During 1996 and 1995, CILCO utilized NYMEX (New York Mercantile Exchange)
futures contracts to hedge approximately 19% and 3%, respectively, of owned
natural gas storage.  The purpose of the pilot program is to provide a higher
level of natural gas price stability for CILCO's natural gas customers and
reduce the cost of natural gas injected into CILCO owned storage fields.  The
program includes investments in derivatives such as futures, options and swap
agreements.  CILCO does not trade these financial instruments and accounts for
them as hedges under SFAS No. 80, "Accounting for Futures Contracts."  Any
gains or losses from these financial instruments are reflected as adjustments
to Gas in Underground Storage on the balance sheets.  As natural gas is
withdrawn from storage, gains or losses are passed to customers through the
purchased gas adjustment clause, which is included in Gas Purchased for Resale
on the income statement.

NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following quarterly operating results are unaudited, but, in the opinion
of management, include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the Company's operating results
for the periods indicated.  The results of operations for each of the fiscal
quarters are not necessarily comparable to, or indicative of, the results of
an entire year due to the seasonal nature of the Company's business and other
factors.

<TABLE>
<CAPTION>
For the Three Months Ended  March 31      June 30    September 30   December 31
                            (In thousands except per share amounts)
<S>                            <C>           <C>          <C>          <C>
1996                                                                           
Revenue                        $177,986     $129,708     $138,562      $182,136
Income before income taxes       16,984        3,767       20,031         1,666
Net income                       10,394        2,527       12,472         2,550
Earnings per average                                                           
   common share                $    .78     $    .19     $    .92      $    .18


1995                                                                           
Revenue                        $170,587     $132,490     $157,574      $154,089
Income before income taxes       18,833        8,890       32,031         2,102
Net income                       11,473        5,677       19,435         1,997
Earnings per average                                                           
  common share                     $.88         $.43        $1.47          $.15
</TABLE>